Kerkhof v. Mci Worldcom, Inc.

• Decision Date: 07 March 2002
• Docket Number: No. 01-1237.,No. 01-1236.,01-1236.,01-1237.
• Citation: 282 F.3d 44
• Parties: Janny KERKHOF, Plaintiff, Appellee/Cross-Appellant, v. MCI WORLDCOM, INC., Defendant, Appellant/Cross-Appellee.
• Court: U.S. Court of Appeals — First Circuit

282 F.3d 44

Janny KERKHOF, Plaintiff, Appellee/Cross-Appellant, v. MCI WORLDCOM, INC., Defendant, Appellant/Cross-Appellee.

No. 01-1236.

No. 01-1237.

United States Court of Appeals, First Circuit.

Heard December 5, 2001.

Decided March 7, 2002.

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James R. Erwin with whom Margaret Coughlin LePage, Joanne S. Hanson and Pierce Atwood were on brief for defendant.

Robert C. Brooks with whom Daniel L. Rosenthal and Verrill & Dana, LLP were on brief for plaintiff.

Before BOUDIN, Chief Judge, TORRUELLA, Circuit Judge, and CYR, Senior Circuit Judge.

BOUDIN, Chief Judge.

Janny Kerkhof and her former employer, MCI WorldCom, Inc. ("WorldCom"), cross-appeal from the district court's judgment resolving several disputes about employee benefits claimed by Kerkhof. Kerkhof was hired in May 1995 as a program coordinator in the Vienna, Virginia, office of the telecommunications company MFS International, Inc. ("MFS"), which later merged with WorldCom. She then became eligible not only to receive salary bonuses of up to 20 percent but also to participate in two then-existing employee stock benefit plans.

One plan, the MFS 1993 Stock Plan ("the MFS Plan"), which the parties here construe under Virginia law, gave a compensation committee comprised of MFS board members power to award stock options to qualified employees. In September 1995, Kerkhof was granted 600 MFS options whose terms were set forth in a separate "stock option agreement" executed by Kerkhof and WorldCom. That agreement specified the exercise price and provided for gradual vesting over a five year period. When MFS later merged with WorldCom, the MFS options were converted into options for 1,260 WorldCom shares with a restated exercise price.

The other plan, known as the ShareWorks Grant Plan, allowed participants to have MFS shares valued at up to five percent of base salary placed in a taxqualified retirement plan, see 26 U.S.C. § 401(a) (1994). The ShareWorks Grant Plan was governed by ERISA, 29 U.S.C. § 1001 et seq. (1994 & Supp. V 1999). Kerkhof elected to participate in this plan and in 1995 received a grant of MFS shares equal to 268 WorldCom shares (plus a fraction) after the merger. Under plan terms, these shares vested only when Kerkhof attained three years of service.

Under both plans, an employee forfeited unvested options or shares upon voluntary resignation; forfeiture was immediate under the stock option agreement and at the end of the calendar year under the ShareWorks Grant Plan. The ShareWorks Grant Plan qualified this by providing that unvested shares would immediately vest if the company terminated the plan. A second qualification, contained in both that plan and the stock option agreement, provided for immediate vesting upon "constructive involuntary termination" within two years after a "change of control," the former phrase being expressly defined to include any of three events: "a material reduction in the Employee's compensation (including applicable fringe benefits)"; "demotion or diminution in the Employee's authority, duties, or responsibilities without cause"; or involuntary relocation.

WorldCom and MFS merged on December 31, 1996, comprising a change of control for MFS, and this was followed by changes both for Kerkhof and for the plans. On April 3, 1997, Kerkhof was told that she was being reassigned to a new position under a new supervisor, Judy Cody. That same month, the MFS Plan was terminated. In May, WorldCom eliminated its annual salary bonus program, under which Kerkhof had received cash bonuses in the two prior years; instead Kerkhof was told she would receive a small annual holiday bonus ($400) and, later that year, a one-time grant of 1,200 WorldCom options. At the same time WorldCom also announced that no further contributions would be made under the ShareWorks Grant Plan, and on June 30 it terminated the plan.

On June 6, 1997, Kerkhof resigned and submitted a claim for accelerated vesting of all her existing but unvested stock benefits: the 882 stock options under the MFS Plan that remained unvested (out of the original 1,260) and all of the ShareWorks Grant Plan shares (just over 268), which were due to vest after three years of service. Kerkhof claimed that her reassignment was a demotion comprising "constructive involuntary termination." The compensation committee ruled otherwise and forfeited the unvested shares and options.

In April 1999, Kerkhof brought suit in federal district court in Maine. Excluding counts later dropped, the complaint contained three basic charges: that Kerkhof was entitled to vesting of her MFS Plan stock options after having been constructively involuntarily terminated (count 1); that she was entitled to accelerated vesting of her ShareWorks Grant Plan shares for the same reason and, in addition, because WorldCom terminated that plan in June 1997, before the shares were forfeited at year's end (counts 3 and 4); and that she was due civil penalties for WorldCom's failure to provide specified benefits information described below (counts 5 and 10).

On cross motions, the magistrate judge recommended summary judgment in Kerkhof's favor on counts 3 and 4 (the ShareWorks Grant Plan shares) and in WorldCom's favor on counts 5 and 10 (the civil penalties). On count 1 (the stock options), the magistrate judge recommended a trial because a factual dispute existed as to whether Kerkhof's pay or duties had been diminished after the change in control. The district court adopted the recommendations, but denied a post-summary judgment request by Kerkhof to obtain class action status for her successful claim for the ShareWorks Grant Plan shares under counts 3 and 4.

At the ensuing trial in October 2000, the jury delivered a general verdict on count 1 in Kerkhof's favor, and the parties stipulated to an award of $23,391. Each side has appealed adverse rulings against it. Importantly, WorldCom has appealed on multiple grounds from the judgment based on the jury verdict in favor of Kerkhof on count 1; its brief also attacks the summary judgment for Kerkhof on counts 3 and 4, but (as we shall see) that is no longer a live issue. Kerkhof seeks review of the district court's denial of her motion for class certification on counts 3 and 4 and the summary judgment against her on counts 5 and 10.

While these appeals were pending, WorldCom concluded that Kerkhof was entitled to vesting of her shares under the ShareWorks Grant Plan on a ground previously unnoticed by either party: that Kerkhof's two-plus years of employment (May 22, 1995, to June 6, 1997) satisfied the three-year service requirement because the plan defines a year of service as any calendar year in which an employee attains at least 1,000 hours of service (each work week counting as 45 hours). Kerkhof crossed this threshold in all three years. Because WorldCom then vested the shares, both sides agree that the claims as to counts 3 and 4 are moot, but they disagree as to whether we should vacate the judgment below.

Unvested stock options under the MFS Plan. As to count 1, WorldCom says that it was entitled to judgment as a matter of law because the compensation committee's denial of Kerkhof's claim was not "arbitrary and capricious." This standard is normally used where an ERISA-governed plan clearly gives the plan administrator discretion as to the issue in question. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109-12, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989). Here, neither side argues that the MFS Plan or the stock option agreement is governed by ERISA, and we do not independently address the question. See Mauldin v. Worldcom, Inc., 263 F.3d 1205, 1211 & n. 2 (10th Cir.2001).

Instead, WorldCom's argument is that it is entitled to the arbitrary and capricious standard under state-law trust and contract principles. At trial, the district court rejected the argument. It ruled that the agreement was a standalone integrated contract which neither contained, nor adopted by cross-reference to the MFS Plan, any grant conferring discretionary authority on the committee to resolve disputed claims.

WorldCom initially relied on the arbitrary and capricious standard only as to the shares under the ShareWorks Grant Plan, which is subject to ERISA. Kerkhof now says that failure to include this argument in the answer as a defense to the MFS Plan claims or to raise it until shortly before trial constitutes waiver under Fed. R.Civ.P. 8(c). See Knapp Shoes, Inc. v. Sylvania Shoe Mfg. Corp., 15 F.3d 1222, 1226 (1st Cir.1994).¹ Whether the arbitrary and capricious standard in this context comprises an affirmative defense subject to Rule 8(c) might be debated. See generally 5 Wright & Miller, Federal Practice & Procedure §§ 1270-71 (1990). Since we agree with the district judge that the stock option agreement was a completely integrated contract, we bypass the waiver claim.

WorldCom's argument on the merits begins with the fact that the MFS Plan contains a somewhat broad provision granting the committee "plenary authority in its discretion," subject to the express provisions of the plan, to determine "the terms of all Benefits" granted under the plan, "including without limitation" an array of listed matters. Most of these are directed to the terms on which stock or options might be granted (e.g., price, vesting, number of shares); but a catch-all phrase allows the committee to "interpret the Plan and to make all other determinations deemed advisable in the administration of the Plan."

However, the plan also provides that each option grant "shall be evidenced by a written agreement containing terms and conditions" set by the committee. In this case, the stock option agreement issued to Kerkhof, and executed by both sides, appears on its face to contain everything needed to comprise an ordinary stock option agreement. Nothing in the agreement speaks of discretion residing in the committee; nor does...